Five insights from Southeast Asia and China on how their startup ecosystems are shaping up in 2023

Welcome to this edition of Hedwig—a bimonthly newsletter that gives you a bird’s eye view of the Asian startup and investor community.

| VC edition–Part 2

In the second part of the Asian tech startup ecosystem overview, we look at what’s going on in Southeast Asia and China—in five points. Let’s jump right into it.?

Southeast Asia?

1. Big picture: Southeast Asia will drive Asia’s growth in the 2020s, as per Asia Partners’ recent report. After all, the region, the PE firm argues, has entered a golden age of rising affluence that has been associated with large tech companies' formation in China, Korea, and Japan in the past.?

Indeed, the region’s economy showed resilience in 2022. For instance, Indonesia’s economy grew 5.31% last year, hitting a nine-year high, while Malaysia recorded an 8.7% growth over 2021, the highest in the last 22 years.?

Overall, ASEAN-5 countries (Indonesia, Malaysia, Philippines, Singapore, Thailand) are estimated to have grown at 5.2% in 2022. And though this year, the growth of ASEAN-5 countries will come down to 4.3%—since the slowing global growth will sadly outweigh the positive impact of China’s reopening—it will pick up to 4.7% in 2024.

2. Zooming in:? Southeast Asian startups raised a total of US$17.79 billion in equity and debt funding last year, 31% less than the US$25.7 billion they received in 2021, as per a DealStreeAsia report.?

Of the total amount, US$15.8 billion came from equity funding. More importantly, equity deals were up 9.6% to 1062 in 2022, over a year ago. What this means is, although VCs invested lesser than before, they wrote more and more checks for early-stage companies. The median value for seed funding rose 56% to US$2.5 million, while series A deals rose 8% to US$8.1 million compared to 2021.

At US$9.79 billion, Singaporean startups raised the most funds in the region, followed by Indonesian startups, which received US$ 3.77 billion from VCs. The two countries accounted for 86% of the region’s entire equity funding. Fintech, e-commerce, and gaming were the top three funded sectors in the region.

Given the constricted funding flow, only eight Southeast Asian startups entered the unicorn club last year as opposed to 23 in 2021. Singapore and Indonesia accounted for three billion-dollar companies each, and rest two emerged from the Phillipines and Thailand.?

3. Standing out: ?After becoming a global fintech center, Singapore aims to emerge as the regional center of green technology. To achieve its goal of net zero carbon emissions by 2050, the city-state is pinning hope on its tech ecosystem. Investors are also getting enthusiastic about climate tech startups in Southeast Asia, with Singapore as their favorite.?

For context, in the first 11 months of 2022, Southeast Asian climate tech startups raised US$1.1 billion in equity and debt, compared to US$607 million in 2021 and US$54 million in 2018. Singaporean firms attracted 80.4% of the total climate VC funding last year. And the momentum is continuing well into 2023.?

4. Trend in making: In the region’s largest economy, Indonesia, VCs continue to favor agritech firms. In 2022, the number of deals almost doubled to 25 in the segment and the funding amount jumped to 2.5X to US$375.9 million over a year ago period. The country—one of the largest producers and exporters of agricultural and seafood products—is home to over 70 agritech startups that work on improving farmer productivity, access to financing, and market linkages.?

Notably, Indonesia seems to have accounted for nearly 70% of agritech deals in the region last year. Beyond agritech startups, investors are leaning toward backing more and more Indonesian logistics startups.

5. Spotlight: Fintech continues to shine bright in Southeast Asia. And that is evident from the two facts. One, fintech was the most funded sector in the region, with startups amassing US$5.01 billion in 233 deals in 2022, a third of the region’s total equity funding. And second, of the eight new Southeast Asian startups that entered the unicorn club last year, five were fintech firms.?

Not surprisingly, Singapore-based fintech startups landed a total of US$2.31 billion in venture capital across 85 deals, compared to US$2.04 billion across 66 deals in 2021. Interestingly, digital banks have become vogue in the region since 2021, beginning with Indonesia and Singapore. Malaysia and Thailand are next in line.?

China

1. Big picture: After three years, China reopened its borders in the second week of January 2023. As mobility and activity pick up, the world’s second-largest economy will expand by 5.2% this year, up from 3% in 2022—one of the lowest GDP growth in decades.?

The Chinese economy is now expected to contribute a quarter of global growth in 2023, as per IMF. However, sustaining growth in the long term will come down to boosting declining productivity growth at a time when China’s population—and by extension, its labor force—is shrinking and returns on capital investment are diminishing.

IMF analysis shows when China grows by 1 percentage point, growth in other countries increases by around 0.3 percentage points. And without structural reforms to increase productivity, China’s growth may fall below 4% over the next five years.?

2. Diving deeper: China has vowed to make consumption the main driving force of the economy in 2023, and this renewed commitment to boost the sagging economy has brightened the deals outlook. Beyond spurring domestic demand, China’s current focus is on attracting foreign investment and supporting the private sector.?

To that effect, China has stepped up proposal approvals for foreign financial companies looking to expand into the country. Notably, despite the tumultuous 2022, China’s inbound foreign direct investment grew 8% to US$189.13 billion. The optimism around the nation’s reopening was such that in less than three weeks of 2023, foreign buying of Chinese stocks exceed last year’s total. ?In fact, foreign money that flowed into China equities sent the benchmark index (CSI300) up 7.4% in January.?

The country has also loosened its grip on local tech titans including fintech behemoth Ant Group, ride-hailing giant Didi, and gaming major Tencent. After all, the Chinese government is betting on internet platforms to play a vital role in reviving the country’s sluggish economy.?

3. Zooming in: Chinese startups raised US$53.2 billion in 2022, 39% less than the US$87.4 billion they received in 2021, as per DealStreetAsia. The number of deals, however, rose 21% to 2,290—a sign that investors wrote smaller cheques. Another research firm, GlobalData, puts venture capital funding in Chinese startups at US$57.4 billion in 2022—down 46.4% from US$107 billion in 2021.

Nonetheless, China minted 83 unicorns in 2022, though it was less than a record 113 in the year before. Advanced manufacturing has risen as the unicorn sector in China in the last few years. Within this sector, semiconductors and new energy are the new hot breeding grounds for billion-dollar companies.?

What’s more interesting is this: there were 80 Chinese startups that dropped off the unicorn list in 2021 when the VC money was overflowing, but only 48 left the billion-dollar club in 2022—the year the funding dried up.?

4. Trend in making:? Chinese giants are not going to just sit and watch while Microsoft and Google begin the fight for dominance in AI. Over the last couple of weeks, several Chinese tech firms have jumped into the AI race by revealing their plans to launch ChatGPT-like services in the near future.

Search giant Baidu is working on an AI chatbot called Ernie Bot and plans to complete internal testing on it by March. When the company announced the development in early February, its shares leaped to an 11-month high. Alibaba is building a ChatGPT-style dialogue tool that it has opened to its employees for testing, while Tencent has confirmed its research plans on AI-generated content. Meanwhile, online retailer JD.com said it will integrate large language models—the tech behind the ChatGPT and Bard—in its own services. Gaming giant NetEase is also looking to incorporate AI-generated content into its education unit.

Interestingly, ChatGPT isn’t available in China, but the OpenAI models behind the ChatGPT program are relatively accessible and are being tapped by consumer technology applications, as per a Reuters report.?

5. Trouble brewing: The diplomatic tensions between the U.S. and China have escalated to an all-time high over a high-altitude Chinese balloon that was spotted floating in the US skies in early February. China maintained it was a weather balloon that had drifted over the US. The American government, of course, didn’t believe it and shot it down after five days.?

The US said the Chinese spy balloon contained sensors and had the ability to collect electronic communications. And that it was part of a fleet that surveilled more than 40 countries. American authorities also claimed ?Chinese spy balloons traversed the United States four times previously.

Since the US downed the Chinese balloon on February 4, America has taken down three more unidentified flying objects. China, on its part, said the US had sent high-altitude balloons into Chinese airspace over 10 times since the start of 2022. Washington and its allies are now considering punishing Beijing with stiffer restrictions on products it needs to advance its military and economic might.?

While the spy balloon drama is unfolding, the recent official figures highlighted that trade between the US and China hit a record high of US$690.6 billion in 2022 despite all the conflicts. Now it remains to be seen how things turn out this year.?

That’s all for Part 2 of the VC edition of Hedwig. In the third part, we will dive into the Indian startup ecosystem and how it has been faring.?

For an overview of different segments of the Asian startup ecosystem, subscribe to Hedwig to read it every second Wednesday.?

About The Content House?

For any business, good content is crucial to attract the target audience, build credibility, increase brand value, and position itself as a thought leader. That is where we come in. We put thinking in writing that crisply conveys complex ideas in the most simplified and engaging way and encapsulates the vision of the company. The Content House understands the important role content plays for enterprises and aims to offer research-based, analytical, thought leadership yet narrative content services to them. We specialize in crafting insightful content for the tech startup and investor ecosystem.